The 2019 federal budget proposed a number of changes to the Canada Business Corporations Act. One in particular, which is expected to receive Royal Assent soon, would allow a corporation’s board of directors to consider the interests of certain prescribed stakeholders, the environment and the long-term interests of the corporation. While the intention may be to clarify and broaden the scope of directors’ duties to act in the best long-term interests of a corporation, the amendment’s muddled language may have the opposite effect. So instead of making it easier for a director to consider a company’s impact on the climate, it could make it harder.
The amendment to the CBCA was characterized as a “codification” of the Supreme Court of Canada’s 2008 decision in BCE Inc. v. 1976 Debentureholders regarding directors’ duties to act in the best interests of the corporation. The BCE decision helped to shred the notion that a corporation only exists to serve shareholders. It was a watershed moment for the stakeholder capitalism model making clear that a broader array of employee, consumer, environmental interests could be properly considered.
The Supreme Court in BCE was clear that directors owe their statutory duty of loyalty to the corporation itself and that, in considering the best interests of the corporation, the board may consider the impact of corporate decisions on “shareholders or particular groups of stakeholders,” including “the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment” to ensure that they are treated fairly.
The Supreme Court also stated in BCE that: “The duty of the directors to the corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation.” While the Court viewed the long-term interests of the corporation as an essential element of directors’ duties, the proposed amendment lumps it in with stakeholders and the environment, making the consideration permissive.
In addition, by specifying certain types of stakeholders, the proposed amendments may relegate others to a lesser status. Both would almost certainly be unintended outcomes. It is unlikely that the government was trying to relieve directors of an obligation to consider long-term interests or limit those stakeholders whose interests a board may choose to consider.
In his 2018 annual letter to shareholders, BlackRock CEO Larry Fink contended that, in the absence of “a sense of purpose,” corporations will “succumb to short-term pressures to distribute earnings and, in the process, sacrifice investments in employee development, innovation and capital expenditures that are necessary for long-term growth.” As the world’s largest asset manager, Fink argued that this will ultimately result in subpar returns to investors who depend on their investments to fund their retirement, home purchases or higher education. Just as global expectations are converging around an understanding of corporate purpose that focuses on long-term interests, the federal government’s proposed amendment would take a step in the opposite direction. At best, this can only serve to create uncertainty.
There is another logical statutory amendment that should be made to “codify” the BCE decision. The Supreme Court, in BCE, was focused on the fair resolution of conflicting interests in the context of the oppression remedy. That remedy has been widely recognized as one of the broadest and most open-ended in the common law world – allowing certain corporate stakeholders to seek relief for breaches that amount to “oppression,” “unfair prejudice” or “unfair disregard” of their interests.
That said, the statutory language describing which stakeholders can access the remedy is somewhat muddled. While the definition of “complainant” (those who can bring a claim) is open-ended, “in the discretion of the court,” the wording of the statute suggests that the harm complained of must be suffered by a “security holder, creditor, director or officer” of the corporation. The reason for this difference (if it was considered) was not addressed when the remedy was added to the statute in 1975 and is not apparent. Nor is it consistent with the Supreme Court’s discussion in BCE of the remedy as a means of protecting stakeholder interests. A simple fix would be to replace the words “security holder, creditor, director or officer” with “stakeholder” – an open-ended concept that has been judicially defined in the BCE decision.
Rather than potentially creating new problems, hopefully the government will reconsider the proposed amendment and use the opportunity to solve an old one, providing an effective remedial discipline if directors don’t mediate stakeholder interests having regard for the unique circumstances faced by a corporation. This should better enable our court’s understanding of corporate purpose to continue to adapt over time to reflect evolving social norms and expectations as to the proper role of the corporation in society.
Ed Waitzer is a Professor and holds the Jarislowsky Dimma Mooney Chair in Corporate Governance at Osgoode Hall Law School and the Schulich School of Business, York University.